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FORM 10-K
UNITED STATES
SECURlTIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended September 30, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from__________to__________
Commission File Number 1-13793
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1504091
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(State or other jurisdiction of I.R.S. Employer
Incorporation or organization) Identification No.)
12 E. BROAD STREET, HAZLETON, PENNSYLVANIA 18201-6591
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (570) 459-3700
--------------
Securities registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, par value $0.01 per share American Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate by a check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K
The aggregate market value of the voting and non-voting stock held by non
affiliates of the registrant i.e., persons other than directors and executive
officers of the registrant is $72.6 million and is based on the last sales price
as quoted on the American Stock Exchange for December 17, 2001.
The number of shares of common stock outstanding as of December 17, 2001 was
4,816,362.
(1) Portions of the Annual Report to Shareholders for the year ended September
30, 2001 are incorporated by reference into Part I, Part II and Part IV of
this Form 10-K.
(2) Portions of the definitive proxy statement for the 2002 Annual Meeting of
Shareholders are incorporated by reference into Part I and Part III of this
Form 10-K.
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
FORM 10-K
TABLE OF CONTENTS
Part I Page
- - ------ ----
Item 1 Business 1
Item 2 Properties 13
Item3 Legal Proceedings 14
Item 4 Submission of Matters to a Vote of Security Holders 14
Part II
- - -------
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 15
Item 6 Selected Financial Data 15
Item 7 Management's Discussion and Analysis of Financial Condition and Results of 15
Operation
Item 7A Quantitative and Qualitative Disclosures About Market Risk 15
Item 8 Financial Statements 15
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 15
Part III
- - --------
Item 10 Directors and Executive Officers of the Registrant 16
Item 11 Executive Compensation 16
Item 12 Security Ownership of Certain Beneficial Owners and Management 16
Item 13 Certain Relationships and Related Transactions 16
Part IV
- - -------
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 17
SIGNATURES 19
Part I
Forward Looking Statements
In addition to historical information, our 10-K may include certain
"forward-looking statements" within the meaning of the federal securities laws.
Such forward-looking statements may be identified by the use of such words as
"intend", "believe", "expect", "anticipate", "should", "planned", "estimated"
and "potential". These forward-looking statements include, but are not limited
to, estimates and expectations of future performance based on current management
expectations. Northeast Pennsylvania Financial Corp.'s (the "Company") actual
results could differ materially from those management expectations. Factors that
could cause future results to vary from current management expectations include,
but are not limited to, general economic conditions, legislative and regulatory
changes, monetary and fiscal policies of the federal government, changes in tax
policies, rates and regulation of federal, state and local tax authorities,
changes in interest rates, deposit flows, the cost of funds, demand for loan
products, demand for financial services, competition, changes in the quality or
composition of the Company's loan and investment portfolios, changes in
accounting principles, policies or guidelines, and other economic, competitive,
governmental and technological factors affecting the Company's operations,
markets, products, services and prices. Because of the risks and uncertainties
inherent in forward-looking statements, readers are cautioned not to place undue
reliance on them, whether included in this report or made elsewhere from time to
time by the Company or on its behalf. Subject to applicable law and regulation,
the Company assumes no obligation to update any forward-looking statements.
Item 1. Business
General
The Company is a Delaware corporation and is the holding company for First
Federal Bank (the "Bank"), a federally chartered capital stock savings bank
regulated by the Office of Thrift Supervision ("OTS"). The Company's executive
offices are located at 12 East Broad Street, Hazleton, Pennsylvania 18201.
The Company's operations are primarily conducted through the Bank. These
operations have been and continue to be attracting retail deposits from the
general public in the areas surrounding its 16 full service community offices
and investing those deposits, together with funds generated from operations and
borrowings, primarily in one- to four-family mortgage loans, consumer loans, and
multi-family and commercial loans. The Company has attempted to diversify and
expand its loan products to better serve its customer base by placing a greater
emphasis on its consumer lending and commercial lending, primarily to small
businesses and municipalities. The Company began offering loan products which it
has historically not offered, such as nonconforming one- to four-family loans.
The loan products are currently being held in the Bank's portfolio, however they
have been originated to be saleable in the secondary market.
The Company's revenues are derived principally from interest on its loans,
and to a lesser extent, interest and dividends on its investment and
mortgage-related securities and other non-interest income. The Company's primary
sources of funds are deposits, principal and interest payments on loans and
mortgage related securities, FHLB advances and proceeds from the sale of loans.
In addition other business of the Company is conducted through its other
subsidiaries, Abstractors, Inc., which is a title insurance agency, Northeast
Pennsylvania Trust Co. (the "Trust Co."), which offers trust, estate and asset
management services and products and Higgins Insurance Agency ("Higgins"), which
provides insurance and investment products to individuals and businesses.
Insurance premium income has increased signigicantly over the past year due to
the addition of Higgins and the continued growth of Abstractors, Inc. The Trust
Co. continues to expand its customer base with assets under managemnt of $109.3
million at September 30, 2001.
Market Area and Competition
The Company is a community-oriented banking institution offering a variety
of financial products and services to meet the needs of the communities it
serves. The Company's lending and deposit gathering is concentrated in its
market area consisting of Luzerne, Carbon, Columbia, Monroe, Montour and
Schuylkill counties in Northeastern and Central Pennsylvania. The Company
invests primarily in loans secured by first or second mortgages on properties
located in areas surrounding its offices.
The Company maintains its headquarters in Hazleton with six other banking
offices in Luzerne County. The Company's seven offices in Luzerne County,
including Hazleton, accounted for $301.4 million or 58.4% of the Company's total
deposits at September 30, 2001. Hazleton is situated approximately 100 miles
from Philadelphia and New York City and approximately 50 miles from Allentown
and the Wilkes-Barre/Scranton area. The Company also maintains two banking
branch offices in Bloomsburg (Columbia County), one each in Lehighton and
Weatherly (both in Carbon County), one in Danville (Montour County), and one
each in Frackville, Pottsville and Shenandoah (all in Schuylkill County). The
Company also operates a banking branch and a loan production office in Monroe
County.
The economy of the greater Hazleton area is characterized by diversified
light manufacturing and is the site of production facilities for several major
manufacturers including Union Camp, Hershey-Cadbury Chocolates, Quebecor and
Hazleton Pumps, Inc. As a consequence, the manufacturing sector employs more
than one third of the area's work force. The Hazleton area has excellent access
to major highway transportation routes including Interstates 80 and 81 as well
as rail transportation. The population of Luzerne County has remained relatively
static and has
1
one of the oldest average ages for all counties in the United States. The
overall population in the Company's market area is relatively small and, in
recent years, has grown slowly, and the unemployment rate in the area is greater
than the national average.
Monroe County, the location of the Pocono Pines loan production office and
the Brodheadsville banking branch, is dominated by the Pocono Mountains, making
the area one of the Mid-Atlantic's most popular resort areas. The Company
established its loan production office to take advantage of the market for
vacation properties existing in Monroe County as well as to be involved in the
growth in the number of permanent residents relocating into the county.
The Company faces significant competition both in generating loans and in
attracting deposits. The Company's primary market area is highly competitive and
the Bank faces direct competition from a significant number of financial
institutions, many with a state wide or regional presence and, in some cases, a
national presence. Many of these financial institutions are significantly larger
and have greater financial resources than the Company. The Company's competition
for loans comes principally from commercial banks, savings banks, credit unions,
mortgage brokers, mortgage banking companies and insurance companies. Its most
direct competition for deposits has historically come from savings banks and
associations, commercial banks and credit unions. In addition, the Bank faces
increasing competition for deposits from non-bank institutions such as brokerage
firms and insurance companies in such instruments as short-term money market
funds, corporate and government securities funds, mutual funds and annuities.
Competition has also increased as a result of the lifting of restrictions on the
interstate operations of financial institutions, as a result of legislative,
regulatory and technological changes and the continuing trend of consolidation
in the financial services industry. Technological advances, for example, have
lowered barriers to market entry, allowed banks to expand their geographic reach
by providing services over the Internet and made it possible for non-depository
institutions to offer products and services that traditionally have been
provided by banks. The Gramm-Leach-Bliley Act, which permits affiliation among
banks, securities firms and insurance companies also changed the competitive
environment in which the Bank conducts business.
In addition, the Company recognizes that its customer base increasingly
focuses on convenience and access to services. The Company has addressed these
customer desires through the implementation of PC banking and voice response
capabilities, a computerized loan origination and document system and the
issuance of debit cards. The Company intends to continue to evaluate and enhance
its service delivery system.
LENDING ACTIVITIES
General. The information relating to the composition and maturity of the
Bank's loan portfolio appears in "Loans" in the Company's 2001 Annual Report to
Shareholders and is incorporated herein by reference.
Origination and Sale of Loans. The Bank's lending activities are conducted
primarily by its loan personnel operating at its branch and loan origination
offices. All loans originated by the Bank are underwritten pursuant to the
Bank's policies and procedures. For fiscal 2001 and 2000, the Bank originated or
purchased $185.2 million and $160.0 million in total loans, respectively. The
Bank originates both adjustable-rate and longer-term and shorter-term fixed-rate
loans. The Bank's ability to originate fixed- or adjustable-rate loans is
dependent upon the relative customer demand for such loans, which is affected by
the current and expected future level of interest rates.
It currently is the policy of the Bank to retain for investment longer-term
(greater than 15 years to maturity at date of origination) fixed-rate one- to
four- family loans originated during a fiscal year only up to 25% of its total
loan originations during that year. In addition, the Bank generally retains the
adjustable rate and shorter-term (maturities of 15 years or less) fixed-rate
loans originated. The Company sells in the secondary market longer-term,
fixed-rate one- to four-family loans which it originates in excess of its
retention policy for such loans.
During fiscal years 2001 and 2000 the Bank originated or purchased $24.0
million and $34.3 million, respectively, of one- to four-family mortgage loans.
In addition, during fiscal years 2001 and 2000, the Bank originated $13.1
million and $10.3 million, respectively, of construction loans. All of such
construction loans were for owner financing of single family properties, which,
upon completion of the construction phase, generally would convert to permanent
financing. Also, the Bank originated $27.4 million and $25.5 million,
respectively, of multi-family and commercial real estate loans during fiscal
2001 and 2000.
Also, during fiscal 2001 and 2000, the Bank originated or purchased $87.3
million and $67.1 million of consumer loans, respectively. These originations,
during fiscal 2001 and 2000, consisted of $17.5 million and $16.5 million,
respectively, of home equity loans, $6.2 million and $4.0 million, respectively,
of home equity lines of credit, $57.6 million and $39.3 million, respectively,
of direct and indirect automobile loans, $1.9 million and $2.0 million,
respectively, of education loans, and $4.2 million and $5.2 million,
respectively, of other consumer loans. The increase in automobile loans is a
direct result of more participating auto dealers.
In addition, during fiscal 2001 and 2000 respectively, the Bank originated
$33.4 million and $22.9 million of commercial loans. These originations
consisted primarily of commercial business and municipal loans.
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The following table sets forth the Bank's loan originations, purchases, sales
and principal repayments for the periods indicated:
For the Fiscal Years Ended September 30,
(In Thousands)
2001 2000 1999
---- ---- ----
Loans at beginning of period $426,754 $372,799 $290,564
Originations and Purchases:
Real estate:
One- to four-family 23,961 34,316 65,456
Multi-family and commercial 27,418 25,452 26,524
Construction 13,125 10,274 11,334
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Total real estate loans 64,504 70,042 103,314
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Consumer:
Home equity loans and lines of credit 23,730 20,547 28,457
Automobile 57,596 39,300 21,527
Education 1,855 2,011 1,929
Unsecured lines of credit 586 484 507
Other 3,568 4,758 2,351
-------- -------- --------
Total consumer loans 87,335 67,100 54,771
Commercial 33,351 22,859 11,339
-------- -------- --------
Total loans originated and purchased 185,190 160,001 169,424
-------- -------- --------
Deduct:
Principal loan repayments and prepayments 96,470 110,346 83,043
Loan sales 9,859 1,806 8,219
Transfers to REO 1,281 614 251
-------- -------- --------
Sub-total 107,610 112,766 91,513
-------- -------- --------
Net loan activity 77,580 47,235 77,911
-------- -------- --------
Loans at end of period (1) $504,334 $420,034 $368,475
======== ======== ========
(1) Loans at end of period include loans in process of $6,986, $5,951 and $4,324
for fiscal years 2001, 2000 and 1999, respectively.
One- to Four-Family Mortgage Lending. The Bank currently offers both
fixed-rate and adjustable-rate mortgage ("ARM") loans with maturities of up to
30 years secured by one- to four-family residences. One- to four-family mortgage
loan originations are generally obtained from the Bank's in-house loan
representatives, from existing or past customers, and through referrals from
members of the Bank's local communities.
The origination of ARM loans, as opposed to fixed-rate residential mortgage
loans, helps reduce the Bank's exposure to increases in interest rates. However,
adjustable-rate loans generally pose credit risks not inherent in fixed-rate
loans, primarily because as interest rates rise, the underlying payments of the
borrower rise, thereby increasing the potential for default. Periodic and
lifetime caps on interest rate increases help to reduce the credit risks
associated with adjustable-rate loans but also limit the interest rate
sensitivity of such loans.
Most one- to four-family mortgage loans are underwritten according to
Fannie Mae and Freddie Mac guidelines. In recent years, the Bank began offering
one- to four-family mortgage loans to borrowers whose credit does not fully meet
established Fannie Mae or Freddie Mac standards, for example, the standard
regarding income to debt ratios for the borrower ("subprime loans"). Mortgage
loans originated by the Bank generally include due-on-sale clauses which provide
the Bank with the contractual right to deem the loan immediately due and payable
in the event the borrower transfers ownership of the property without the Bank's
consent. Due-on-sale clauses are an important means of adjusting the yields on
the Bank's fixed-rate mortgage loan portfolio and the Bank has generally
exercised its rights under these clauses. The Bank requires fire, casualty,
title and, in certain cases, flood insurance on all properties securing real
estate loans made by the Bank.
Multi-Family and Commercial Real Estate Lending. The Bank originates
fixed-rate and adjustable- rate multi-family and commercial real estate loans
that generally are secured by properties used for business purposes or a
combination of residential and retail purposes.
Pursuant to the Bank's underwriting policies a multi-family mortgage and
commercial real estate loan may be made in an amount up to 80% of the lower of
the appraised value or sales price of the underlying property with terms
generally ranging from 15 to 25 years.
3
The factors considered by the Bank in granting these loans include: the net
operating income of the mortgaged premises before debt service and depreciation;
the debt coverage ratio (the ratio of net earnings to debt service); and the
ratio of loan amount to appraised value. The Bank has generally required that
the properties securing commercial real estate loans have debt service coverage
ratios of at least 125%.
Construction Lending. The Bank also offers residential construction loans.
Such loans have been for presold one- to four-family residences for the
construction phase and convert into permanent financing. The Bank generates
residential construction loans primarily through direct contact with the
borrower or home builders, and these loans involve properties located in the
Bank's market area. Such loans require that the Bank review plans,
specifications and cost estimates and that the contractor be known to the Bank
to be reputable. The amount of construction advances to be made, together with
the sum of previous disbursements, may not exceed the percentage of completion
of the construction. The maximum loan-to-value limit applicable to such loans is
80%.
Consumer Lending. The Bank offers consumer loans which include home equity
loans, home equity lines of credit, direct and indirect automobile loans,
education loans and other consumer loans. The Bank's home equity loans are
generated primarily through the Bank's retail offices. The Bank generally offers
home equity loans with a term of 180 months or less. The Bank also offers home
equity lines of credit with terms up to 20 years, the last 10 years of which
require full amortization of the principal balance. The maximum loan amount for
both home equity loans and home equity lines of credit, is subject to a combined
loans-to-value ratio of 80%.
The Bank also offers automobile loans, both on a direct and an indirect
basis (through new and used car dealers). The indirect automobile loans are
originated by dealers in accordance with underwriting standards pre-established
by the Bank and are serviced by the Bank. The Bank also offers loans on
recreational vehicles and boats and other consumer loans, including education
loans which are federally guaranteed and originated under regulations of the
Pennsylvania Higher Education Assistance Agency, deposit-secured loans, and
other personal and unsecured loans. The Bank's policy is to sell its education
loans to Sallie Mae with servicing released once the borrower has left school.
Consumer loans tend to bear higher rates of interest and have shorter terms to
maturity than first lien residential mortgage loans. Nationally, consumer loans
have historically tended to have a higher rate of default.
Commercial Lending. The Bank makes commercial business loans primarily in
its market area to a variety of professionals, sole proprietorships and small
businesses. The Bank offers a variety of commercial lending products, including
term loans for fixed assets and working capital, revolving lines of credit,
letters of credit, and Small Business Administration guaranteed loans. Interest
rates charged generally are based on the prime rate as published in the Wall
Street Journal. Prior to making commercial business loans, the borrower is
required to provide the Bank with sufficient information to allow a prudent loan
decision to be made. Such information generally includes financial statements
and projected cash flows, and is reviewed to evaluate debt service capability.
Commercial business loans are generally secured by a variety of collateral,
primarily real estate, and frequently are supported by personal guarantees. In
addition, the Bank actively participates in industrial loans arranged through
and with the Greater Wilkes-Barre Industrial Fund and CanDo, Inc. a Hazleton
area industrial fund.
Commercial business loans generally involve higher credit risks than loans
secured by real estate. Unlike mortgage loans, which generally are made on the
basis of the borrowers ability to make repayment from his or her employment or
other income, and which are secured by real property whose value tends to be
more easily ascertainable, commercial loans are of higher risk and typically are
made on the basis of the borrower's ability to make repayment from the cash flow
of the borrower's business. As a result, the availability of funds for the
repayment of commercial loans may be substantially dependent on the success of
the business itself. Further, any collateral securing such loans may depreciate
over time, may be difficult to appraise and may fluctuate in value based on the
success of the business.
Loan Approval Procedures and Authority. The Board of Directors establishes
the lending policies and the levels of loan approval authority for employees of
the Bank and oversees the Bank's lending activity. The Board of Directors has
established a Loan Committee comprised of the Bank's Chairman of the Board of
Directors, President, Senior Vice President Lending, Senior Vice President/
Chief Financial Officer and at least one outside director to assist them with
these activities.
Non-Performing Assets, Impaired Loans, Real Estate Owned and Allowance for
Loan Losses. The information relating to the Bank's non-performing assets,
impaired loans, real estate owned and allowance for loan losses appears in
"Non-Performing Assets and Impaired Loans" and "Allowance for Loan Losses" in
the Registrant's 2001 Annual Report to Shareholders.
Investment Activities
The above captioned information appears in "Investment Activities" in the
Registrant's 2001 Annual Report to Shareholders and is incorporated herein by
reference.
4
Source of Funds
Information relating generally to the Bank's source of funds and a
description of the Bank's deposits appears under "Sources of Funds" in the
Registrant's 2001 Annual Report to Shareholders and is incorporated herein by
reference.
Borrowings. The Bank utilizes advances from the FHLB of Pittsburgh as a
supplement to retail deposits to fund its operations as part of its operating
strategy. These FHLB advances are collateralized primarily by certain of the
Bank's mortgage loans and mortgage-related securities and secondarily by the
Bank's investment in capital stock of the FHLB of Pittsburgh. FHLB advances are
made pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. The maximum amount that the FHLB of
Pittsburgh will advance to member institutions, including the Bank, fluctuates
from time to time in accordance with the policies of the FHLB of Pittsburgh. See
"Regulation-Federal Home Loan Bank System." At September 30, 2001, the Bank had
$204.4 million in outstanding FHLB advances, compared to $137.5 million at
September 30, 2000. Other borrowings consist of overnight retail repurchase
agreements and for the periods presented were immaterial.
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated:
At or For the Fiscal Years Ended September 30,
-------------------------------------------------
2001 2000 1999
-------------------------------------------------
(Dollars in Thousands)
FHLB advances and other borrowings:
Average balance outstanding $192,981 $191,797 $120,600
Maximum amount outstanding at any month-end
during the period 216,227 226,717 156,504
Balance outstanding at end of period 210,431 139,115 156,504
Weighted average interest rate during the period 5.84% 5.85% 5.23%
Weighted average interest rate at end of period 5.63% 6.13% 5.34%
Subsidiary Activities
The Company has four wholly-owned subsidiaries: the Bank, incorporated
under the laws of the United States, Abstractors, Inc., Northeast Pennsylvania
Trust Co., and Higgins Insurance Agency incorporated under Pennsylvania law.
FIDACO, Inc. is an inactive subsidiary of First Federal Bank with the only major
asset being an investment by FIDACO, Inc. in Hazleton Community Development
Corporation. Abstractors, Inc. is a title insurance agency with total assets of
$298,000 at September 30, 2001. Northeast Pennsylvania Trust Co., offers trust
estate and asset management services and products and has total assets of
$725,000 and $109.3 million of trust assets under management at September 30,
2001. At September 30, 2001 total assets of FIDACO, Inc. were $33,000. Higgins
provides insurance and investment products to individuals and businesses and has
total assets of $1.3 million at September 30, 2001.
Personnel
As of September 30, 2001, the Company had 176 full-time and 26 part-time
employees, none of whom were covered by a collective bargaining agreement.
Management believes that the Company has good relations with its employees and
there are no pending or threatened labor disputes with its employees.
Regulation and Supervision
As a savings and loan holding company, the Company is required by federal
law to file reports with and otherwise comply with, the rules and regulations of
the OTS. The Bank is subject to extensive regulation, examination and
supervision by the OTS, as its chartering agency, and the Federal Deposit
Insurance Corporation (the "FDIC"), as the deposit insurer. The Bank is a member
of the Federal Home Loan Bank ("FHLB") System. The Bank's deposit accounts are
insured up to applicable limits by the Savings Association Insurance Fund
("SAIF") managed by the FDIC. The Bank must file reports with the OTS and the
FDIC concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
with, or acquisitions of, other financial institutions. There are periodic
examinations by the OTS and the FDIC to test the Bank's safety and soundness and
compliance with various regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan
5
loss reserves for regulatory purposes. Any change in such regulatory
requirements and policies, whether by the OTS, the FDIC or the Congress, could
have a material adverse impact on the Company, the Bank and their operations.
Certain of the regulatory requirements applicable to the Bank and to the
Company are referred to below or elsewhere herein. The description of statutory
provisions and regulations applicable to savings associations and their holding
companies set forth in this form 10-K do not purport to be complete descriptions
of such statutes and regulations and their effects on the Bank and the Company
are qualified in its entirety by reference to such statutes and regulations.
Federal Savings Institution and Regulations
Business Activities. The activities of federal savings institutions are
governed by the federal laws and regulations. These laws and regulations
delineate the nature and extent of the activities in which federal associations
may engage. In particular, many types of lending authority for federal
associations, e.g., commercial, non-residential real property loans and consumer
loans, are limited to a specified percentage of the institution's capital or
assets.
Loans-to-One-Borrower. Federal law provides that, savings institutions are
generally subject to the national bank limit on loans-to-one borrower.
Generally, this limit is 15% of the Bank's unimpaired capital and surplus, plus
an additional 10% of unimpaired capital and surplus, if such loan is secured by
readily marketable collateral. At September 30, 2001, the largest aggregate
amount of loan-to-one borrower was $8.1 million, which was less than the Bank's
general limit on loans-to-one borrower which was $9.8 million.
QTL Test. Federal Law requires savings institutions to meet a qualified
thrift lending ("QTL") test. Under the test, a savings association is required
to either qualify as a "domestic building and loan association" under the
Internal Revenue Code or maintain at least 65% of its "portfolio assets" (total
assets less: (i) specified liquid assets up to 20% of total assets; (ii)
intangibles, including goodwill; and (iii) the value of property used to conduct
business) in certain "qualified thrift investments" (primarily residential
mortgages and related investments, including certain mortgage-backed and related
securities) in at least 9 months out of each 12-month period. A savings
association that fails the QTL test is subject to certain operating restrictions
and may be required to convert to a bank charter. As of September 30, 2001 the
Bank maintained 76.5% of its portfolio assets in qualified thrift investments
and, therefore, met the QTL test. Recent legislation has expanded the extent to
which education loans, credit card loans and small business loans may be
considered as "qualified thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, including cash
dividends, payments to repurchase its shares and payments to shareholders of
another institution in a cash-out merger. Under the regulations, an application
to and the prior approval of the OTS is required before any capital distribution
if the institution does not meet the criteria for "expedited treatment" of
applications under OTS regulations (generally, examination ratings in one of two
top categories), the total capital distributions for the calendar year exceed
net income for that year plus the amount of retained net income for the
preceding two years, the institution would be undercapitalized following the
distribution or the distribution would otherwise be contrary to a statute,
regulation or agreement with the OTS. If an application is not required, the
institution must still give advance notice to the OTS of the capital
distribution, if, like the Bank, it is a subsidiary of a holding company. If the
Bank's capital fell below its regulatory requirements or if the OTS notified it
that it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution, which would otherwise be permitted by regulation,
if the OTS determines that the distribution would be unsafe or unsound practice.
Assessments. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessments, paid on a
semi-annual basis, are based upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Bank's latest quarterly
Thrift Financial Report. The assessments paid by the Bank for the year ended
September 30, 2001 totaled $143,000.
Branching. OTS regulations permit federally-chartered savings associations
to branch nationwide under certain conditions. Generally, federal savings
associations may establish interstate networks and geographically diversify
their loan portfolios and lines of business. The OTS authority preempts any
state law purporting to regulate branching by the federal savings associations.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The CRA also requires all institutions to make public
disclosure of their CRA ratings. The Bank received a "Satisfactory" CRA rating
in its most recent examination.
6
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) is limited by federal law. The
aggregate amount of covered transactions with any individual affiliate is
limited to 10% of the capital and surplus of the savings institution. The
aggregate amount of transactions with all affiliates is limited to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
federal law. The purchase of low quality assets from affiliates is generally
prohibited. The transactions with affiliates must be on terms and under
circumstances, that are at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies. In addition, savings institutions are prohibited from lending to any
affiliate that is engaged in activities that are not permissible for bank
holding companies and no savings institution may purchase the securities of any
affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors and
10% shareholders ("insiders"), as well as entities such persons control, is also
governed by federal law. Such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. Recent legislation created an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. The law limits both the individual
and aggregate amount of loans the Bank may make to insiders based, in part, on
the Bank's capital position and requires certain board approval procedures to be
followed.
Enforcement. The OTS has primary enforcement responsibility over savings
institutions and has the authority to bring action against the institution and
all "institution-affiliated parties," including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or $1 million per
day in especially egregious cases. The FDIC has the authority to recommend to
the Director of the OTS that enforcement action be taken with respect to a
particular savings institution. If action is not taken by the Director, the FDIC
has authority to take such action under certain circumstances. Federal law also
establishes criminal penalties for certain violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines Standards for Safety and Soundness. The
guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. The OTS may require the institution to submit
an acceptable plan to achieve compliance with the standard.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital ratio, a
3% leverage (core capital) ratio for institutions receiving the highest
examination rating on the CAMELS examination rating system (4% for others) and
an 8% risk based capital ratio. Core capital is defined as common stockholder's
equity (including retained earnings), certain non-cumulative perpetual preferred
stock and related surplus, minority interests in equity accounts of consolidated
subsidiaries less intangibles other than certain mortgage servicing rights
("MSRs") and credit card relationships. The OTS regulations require that, in
meeting the leverage ratio, tangible and risk-based capital standards
institutions generally must deduct investments in and loans to subsidiaries
engaged in activities not permissible for a national bank. In addition, the OTS
prompt corrective action regulation provides that a savings institution that has
a leverage capital ratio of less than 4% (3% for institutions receiving the
highest CAMEL examination rating) will be deemed to be "undercapitalized" and
may be subject to certain restrictions.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, as assigned by the OTS capital regulation based on the
risks OTS believes are inherent in the type of asset. The components of core
capital are equivalent to those discussed earlier. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses.
Limited to a maximum of 1.25% of risk-weighted assets and equity up to 4.5% of
unrealized gains on available-for-sale securities with readily determinable fair
market value. Overall, the amount of supplementary capital included as part of
total capital cannot exceed 100% of core capital.
The OTS has adopted an interest rate risk component into its regulatory
capital requirements. Savings associations with "above normal" interest rate
risk exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. For the present time, the OTS
has deferred implementation of the interest rate risk capital charge. At
September 30, 2001, the Bank met each of its capital requirements. For the
present time, the OTS has deferred implementation of the interest rate risk
capital charge. As September 30, 2001, the Bank met each of its capital
requirements.
7
The following table presents the Bank's capital position at September 30,
2001. (in thousands)
Capital
-------------------------------------
Excess
Actual Required (Deficiency)
Capital Capital Amount Actual % Required %
------- -------- ------ -------- ----------
Tangible $51,433 $11,862 $39,571 6.5% >1.5%
Core (Leverage) 51,433 23,725 27,708 6.5 >3.0
Risk-based 55,947 38,417 17,530 11.7 >8.0
Prompt Corrective Regulatory Action
The OTS is required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution's degree of capitalization. Generally, a savings institution that
has a total risk-based capital of less than 8% or a leverage ratio or a Tier 1
capital ratio that is less than 4% or a ratio of core capital to total assets of
less than 4% (3% or less for institutions with the higher examination rating) is
considered to be undercapitalized. A savings institution that has a total
risk-based capital less than 6%, a Tier 1 risk-based capital ratio of less than
3% or a leverage ratio that is less than 3% is considered to be "significantly
undercapitalized" and a savings institution that has a tangible capital to
assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the OTS is required to appoint
a receiver or conservator for an institution that is critically
undercapitalized. The regulation also provides that a capital restoration plan
must be filed with the OTS within 45 days of the date an association receives
notice that it is "undercapitalized," significantly undercapitalized" or
"critically undercapitalized." Compliance with the plan must be guaranteed by
any parent holding company. In addition, numerous mandatory supervisory actions
may become immediately applicable to the institution depending upon its
category, including, but not limited to, increased monitoring by regulators,
restrictions on growth, capital distributions and expansion. The OTS could also
take any one of a number of discretionary supervisory actions, including the
issuance of a capital directive and the replacement of senior executive officers
and directors.
Insurance of Deposit Accounts
The FDIC maintains a risk-based assessment system by which institutions are
assigned to one of three categories based on the institution's capitalization
and one of three subcategories based on examination ratings and other
supervisory information. An institution's assessment rate depends on the capital
category and supervisory category to which it is assigned. Assessment rates for
SAIF member institutions are determined semi-annually and range from 0 basis
points, for the healthiest institutions to 27 basis points, for the riskiest
institutions. The Bank's assessment rate for the fiscal year 2001 was 1.94 basis
points and the premium paid for this period was $88,000. The FDIC has authority
to increase insurance assessments. A significant increase in Savings Association
Insurance Funds insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the Bank. Management cannot
predict what insurance assessment rates will be in the future.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the Savings Association
Insurance Fund. During 2001, FICO payments for Savings Association insurance
Fund members approximated 1.9 basis points.
Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and hold
shares of capital stock in the FHLB in an amount at least equal to 1% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. The Bank was in compliance with this
requirement with an investment in FHLB stock at September 30, 2001, of $10.2
million. FHLB advances must be secured by specified types of collateral and all
long-term advances may only be obtained for the purpose of providing funds for
residential housing finance. At September 30, 2001, the Bank had $204.4 million
in FHLB advances.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended September 30, 2001, 2000 and 1999
dividends from the FHLB to the Bank amounted to approximately $673,000, $687,000
and $411,000, respectively. If dividends were reduced, the Bank's net interest
income would likely also be reduced. Recent legislation has changed the
structure of the Federal Home Loan Banks funding obligations for insolvent
thrifts, revised the capital structure of the Federal Home Loan Banks and
implemented entirely voluntary membership for Federal Home
8
Loan Banks. Management cannot predict the effect that these changes may have
with respect to its Federal Home Loan Bank membership.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The regulations generally require
that reserves be maintained against aggregate transaction accounts as follows:
for accounts aggregating $41.3 million or less (subject to adjustment by the
Federal Reserve Board) the reserve requirement is 3%; and for accounts greater
than $41.3 million, the reserve requirement is 10%. The first $5.7 million of
otherwise reservable balances (subject to adjustment by the Federal Reserve
Board) are exempted from the reserve requirements.
Holding Company Regulation
The Company is a non-diversified unitary savings and loan holding company
within the meaning of the federal law. Under prior law, a unitary savings and
loan holding company, such as the Company, was not generally restricted as to
the types of business activities in which it may engage, provided that the Bank
continued to be a qualified thrift lender. See "Federal Savings Institution
Regulation- QTL Test." The Gramm-Leach-Bliley Act of 1999 provides that no
company may acquire control of a savings association after May 4, 1999 unless it
engages only in the financial activities permitted for financial holding
companies under the law or for multiple savings and loan holding companies as
described below. Further, the Gramm-Leach-Bliley Act specifies that existing
savings and loan holding companies may only engage in such activities. The
Gramm-Leach-Bliley Act, however, grandfathered the unrestricted authority for
activities with respect to unitary savings and loan holding companies existing
prior to May 4, 1999, so long as the Bank continues to comply with the QTL Test.
The Company does qualify for the grandfathering.
Upon any non-supervisory acquisition by the Company of another savings
association, the Company would become a multiple savings and loan holding
company (if the acquired institution is held as a separate subsidiary) and would
generally be limited to activities permissible for bank holding companies under
Section 4(c)(8) of the Bank Holding Company Act, as amended (the "BHC Act"),
subject to the prior approval of the OTS, and to other activities authorized by
OTS regulation.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution, or holding company thereof, without prior written approval of the
OTS; from acquiring or retaining, control of a depository institution that is
not insured by the FDIC. In evaluating applications by holding companies to
acquire savings institutions, the OTS must consider the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the insurance funds, the convenience
and needs of the community and competitive factors.
The OTS may not approve any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, except: (i) the approval of interstate supervisory acquisitions by
savings and loan holding companies, and (ii) the acquisition of a savings
institution in another state if the laws of the state of the target savings
institution specifically permit such acquisitions. The states vary in the extent
to which they permit interstate savings and loan holding company acquisitions.
Financial Institution Modernization Legislation. Although savings and loan
holding companies are not currently subject to specific capital requirements or
specific restriction on the payment of dividends or other capital distributions,
federal regulations do prescribe such restrictions on subsidiary savings
institutions as described below. The Bank must notify the OTS 30 days before
declaring any dividend tot he Company. In addition, the financial impact of a
holding company on its subsidiary institution is a matter that is evaluated by
the OTS and the agency has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.
Acquisition of the Company. Under the Federal Change in Bank Control Act
(CIBCA"), a notice must be submitted to the OTS if any person (including a
company), or group acting in concert, seeks to acquire 10% or more of the
Company's outstanding voting stock, unless the Office of Thrift Supervision has
found that the acquisition will not result in a change of control of the
Company. Under the CIBCA, the OTS has 60 days from the filing of a complete
notice to act, taking into consideration certain factors, including the
financial and managerial resources of the acquirer and the anti-trust effects of
the acquisition. Any company that so acquires control would then be subject to
regulation as a savings and loan holding company.
9
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank report their income on a September 30
fiscal year basis using the accrual method of accounting and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below. The following discussion of tax matters is intended only as a summary and
does not purport to be a comprehensive description of the tax rules applicable
to the Bank or the Company. Neither the Company nor the Bank has been audited by
the IRS in the past five years.
Bad Debt Reserve. Historically, savings institutions such as the Bank which
met certain definitional tests primarily related to their assets and the nature
of their business ("qualifying thrifts") were permitted to establish a reserve
for bad debts and to make annual additions thereto, which may have been deducted
in arriving at their taxable income. The Bank's deductions with respect to
"qualifying real property loans," which are generally loans secured by certain
interest in real property, were computed using an amount based on the Bank's
actual loss experience, or a percentage equal to 8% of the Bank's taxable
income, computed with certain modifications and reduced by the amount of any
permitted addition to the non-qualifying reserve. Due to the Bank's loss
experience, the Bank generally recognized a bad debt deduction equal to 8% of
taxable income.
In August 1996, the provisions repealing the above thrift bad debt rules
were passed by Congress as part of "The Small Business Job Protection Act of
1996." The new rules eliminated the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also required that all thrift institutions
recapture all or a portion of their bad debt reserves added since the base year
(the last taxable year beginning before January 1, 1988). The Bank had
previously recorded a deferred tax liability equal to the bad debt recapture and
as such, the new rules will have no effect on net income or federal income tax
expense. For taxable years that began after December 31, 1995, the Bank's bad
debt deduction was equal to net charge-offs. The new rules allowed an
institution to suspend the bad debt reserve recapture for the 1996 and 1997 tax
years if the institution's lending activity for those years was equal to or
greater than the institution's average mortgage lending activity for the six
taxable years preceding 1996. For this purpose, only home purchase and home
improvement loans were included and the institution could have elected to have
the tax years with the highest and lowest lending activity removed from the
average calculation. If an institution was permitted to postpone the reserve
recapture, it had to begin its six year recapture no later than the 1998 tax
year. The unrecaptured base year reserves were not subject to recapture as long
as the institution continued to carry on the business of banking. In addition,
the balance of the pre-1988 bad debt reserves continued to be subject to a
provision of present law referred to below that required recapture in the case
of certain excess distributions to shareholders.
Distributions. To the extent that the Bank makes "non-dividend
distributions" to the Company that are considered as made: (i) from the reserve
for losses on qualifying real property loans, to the extent the reserve for such
losses exceeds the amount that would have been allowed under the experience
method, or (ii) from the supplemental reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed will be included
in the Bank's taxable income. Non-dividend distributions include distributions
in excess of the Bank's current and accumulated earnings and profits,
distributions in redemption of stock, and distributions in partial or complete
liquidation. However, dividends paid out of the Bank's current or accumulated
earnings and profits, as calculated for federal income tax purposes, will not be
considered to result in a distribution from the Bank's bad debt reserve. Thus,
any dividends to the Company that would reduce amounts appropriated to the
Bank's bad debt reserve and deducted for federal income tax purposes would
create a tax liability for the Bank. The amount of additional taxable income
created from an Excess Distribution is an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. Thus if
the Bank makes a "non-dividend distribution," then approximately one and
one-half times the amount so used would be includable in gross income for
federal income tax purposes, assuming a 34% corporate income tax rate (exclusive
of state and local taxes). The Bank does not intend to pay dividends that would
result in a recapture of any portion of its bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI can be offset
by net operating loss carryovers of which the Company currently has none. AMTI
is increased by an amount equal to 75% of the amount by which the Company's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). In addition, for
taxable years beginning after June 30, 1986 and before January 1, 1996, an
environmental tax of 0.12% of the excess of AMTI (with certain modifications)
over $2.0 million is imposed on corporations, including the Company, whether or
not an Alternative Minimum Tax ("AMT") is paid. The Company does not expect to
be subject to the AMT.
Dividends Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company or the Bank owns more than 20% of the stock of a
corporation distributing a dividend then 80% of any dividends received may be
deducted.
10
State and Local Taxation
The Company and its non-thrift Pennsylvania subsidiaries are subject to the
Pennsylvania Corporation Net Income Tax and Capital Stock and Franchise Tax. The
Corporate Net Income Tax rate for fiscal 2001 was 9.99% and was imposed on the
Company's and its non-thrift subsidiaries' unconsolidated taxable income for
federal purposes with certain adjustments. In general, the Capital Stock Tax is
a property tax imposed at the rate of .75% of a corporation's capital stock
value, which is determined in accordance with a fixed formula. The Company is
also required to file an annual report with and pay an annual Franchise tax to
the State of Delaware.
The Bank is taxed under the Pennsylvania Mutual Thrift Institutions Tax Act
(the "MTIT"), as amended, to include thrift institutions having capital stock.
Pursuant to the MTIT, the Bank's tax rate is 11.5%. The MTIT exempts the Bank
from all other taxes imposed by the Commonwealth of Pennsylvania for state
income tax purposes and from all local taxation imposed by political
subdivisions, except taxes on real estate and real estate transfers. The MTIT is
a tax upon net earnings, determined in accordance with generally accepted
accounting principals ("GAAP") with certain adjustments. The MTIT, in computing
GAAP income, allows for the exclusion of interest earned on Pennsylvania and
federal securities, while disallowing a percentage of a thrift's interest
expense deduction in the proportion of interest income on those securities to
the overall interest income of the Bank. Net operating losses, if any,
thereafter can be carried forward three years for MTIT purposes. Neither the
Company nor the Bank has not been audited by the Commonwealth of Pennsylvania in
the last five years.
Additional Item. Executive Officers of the Registrant
- - ---------------- ------------------------------------
The following table sets forth information regarding the executive officers
of the Company and the Bank as of September 30, 2001 who are not directors.
Name Age as of 9/30/01 Position
- - ---- ----------------- --------
Thomas C. Blass 56 Senior Vice President and Trust Officer
of the Trust Company since June 1999.
Trust Officer for financial institution
in Bloomsburg, PA prior to current
position.
Patrick J. Owens, Jr. 58 Senior Vice President, Chief Financial
Officer of the Bank since 1993 and
Treasurer and Chief Financial Officer
of the Company since 1998.
Thomas Burns 51 President and Trust Officer of the Trust
Company since May 2000. Trust Officer
for financial institution in Hazleton, PA
prior to current position.
Allan Farias 54 Senior Vice President, Corporate Retail
Division since September 2000. President
and Chief Executive Officer of a
financial institution and consultant in
California prior to current position.
11
Item 2. Properties
The Company currently conducts its business through 16 full service
community offices located in Luzerne, Carbon, Columbia, Montour and
Schuylkill counties, three financial centers and one loan origination
office in Monroe County in Northeast Pennsylvania. Abstractors, Inc. and
Northeast Pennsylvania Trust Co. conduct their business from the downtown
Hazleton area. The following table sets forth the Company's offices as of
September 30, 2001.
Net Book Value
of Property or
Leasehold
Original Year Improvements Total Deposits
Leased or Leased or Date of Lease at September at September
Location Owned Acquired Expiration 30, 2001 30, 2001
- - -------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
Administrative/Home
Office:
12 E. Broad Street
Hazleton, PA 18201 Owned 1947 - $3,612 $174,217
2 E. Broad Street
Hazleton, PA 18201 Leased 1992 2004 N/A
Branch Offices:
Bloomsburg Office:
17 E. Main Street
Bloomsburg, PA 17815 Owned 1963 - 426 25,138
Shenandoah Office:
5-7 E. Main Street
Shenandoah, PA 17976 Owned 1968 - 376 45,102
Pottsville Office:
111 E. Norweigan Street
Pottsville, PA 17901 Owned 1968 - 556 26,128
Lehighton Office:
111 N. First Street
Lehighton, PA 18235 Owned 1977 - 96 27,703
Laurel Mall Office:
240 Laurel Mall
Hazleton, PA 18201 Leased 1994 2003 201 73,311
Mountaintop Office:
360 S. Mountain Boulevard
Mountaintop, PA 18707 Owned 1997 - 786 19,803
Scott Township Office:
PO Box 518
2691 New Berwick Highway
Bloomsburg, PA 17815 Owned 1998 - 982 37,604
Schuylkill Mall Office:
611 Schuylkill Mall
Frackville, PA 17976 Leased 1978 month-to-month 34 23,700
12
Gould's IGA Office:
Route 93
Sugarloaf, PA 18249 Leased 1995 2005 28 15,446
Danville Office:
1519 Bloom Road
Danville, PA 17821 Owned 1999 - 630 13,025
Back Mountain Office:
196 N. Main Street
Shavertown, PA 18708 Owned 2001 1,186 5,828
Freeland Office:
402 Front Street
Freeland, PA 18224 Leased 1999 2003 28 4,821
Brodheadsville Office:
760 Route 209 & Weirlake Road
Brodheadsville, PA 18322 Leased 2000 2005 43 4,246
Weatherly Office:
140 Carbon Street
Weatherly, PA 18255 Owned 2001 84 11,708
Drums Office:
Route 309
Drums, PA 18222 Owned 2001 226 7,955
Laurel Mall Drive-Thru:
345 Laurel Mall
Hazleton, PA 18201 Leased 2001 2005 299 N/A
Loan Production
Origination Office:
Pocono L.P.O. Office
P.O. Box 1092
Pocono Pines, PA 18350 Leased 1997 month-to-month N/A
Title Insurance Agency:
Abstractors, Inc.
25 W. Broad Street
Hazleton, PA 18201 Owned 2001 24 N/A
Trust Company:
Northeast Pennsylvania Trust Co.
31 W. Broad Street
Hazleton, PA 18201 Owned 2001 49 N/A
Insurance Agency:
Higgins Insurance Company
115 S. Centre Street
Pottsville, PA 17901 Leased 2001 2010 608 N/A
Item 3. Legal Proceedings
The Company is not involved in any pending legal proceedings other
than routine legal proceedings occurring in the ordinary course of
business. Such routine legal proceedings, in the aggregate, are believed by
management to be immaterial to the Company's financial condition or results
of operation.
13
Item 4. Submission of Matters to a Vote of Security Holders
None.
14
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Information relating to the market for Registrant's common equity and
related shareholder matters appears under "Market for Registrant's Common Equity
and Related Shareholder Matters" in the Registrant's 2001 Annual Report to
Shareholders on page 16 and is incorporated herein by reference. Information
relating to dividend restrictions for Registrant's common stock appears under
"Regulation and Supervision."
Item 6. Selected Financial Data
The above-captioned information appears under "Selected Consolidated
Financial and Other Data of the Company" in the Registrant's 2001 Annual Report
to Shareholders and is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The above-captioned information appears under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Registrant's 2001 Annual Report to Shareholders and is incorporated herein by
reference.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
The above-captioned information appears under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations" under
the section "Management of Interest Rate Risk and Market Risk Analysis" in the
Registrant's 2001 Annual Report to Shareholders and is incorporated herein by
reference.
Item 8. Financial Statements
The Consolidated Financial Statements of Northeast Pennsylvania Financial
Corp. and its subsidiaries, together with the report thereon by KPMG LLP appears
in the Registrant's 2001 Annual Report to Shareholders and are incorporated
herein by reference.
Item 9. Changes and Disagreements with Accountants on Accounting and Financial
Disclosure
Not Applicable.
15
Part III
Item 10. Directors and Executive Officers of the Registrant
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Section captioned
"Proposed 1-Election of Directors" in the Registrant's Proxy Statement for the
Annual Meeting of Shareholders to be held on January 30, 2002. Reference is made
to the cover page of this form 10-K and to the section captioned "Section 16 (a)
Beneficial ownership Reporting Compliance" for information regarding compliance
into Section 16(a) of the Exchange Act.
Item 11. Executive Compensation
The information relating to executive compensation is incorporated herein
by reference to the sections captioned "Executive Compensation and Directors
Compensation" in the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on January 30, 2002.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the section captioned
"Stock Ownership" in the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on January 30, 2002.
Item 13. Certain Relationships and Related Transactions
The information relating to certain relationships and related transactions
is incorporated herein by reference to the section captioned "Transactions with
Management" in the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on January 30, 2002.
16
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this report
(1) Consolidated Financial Statements of the Company are incorporated by
reference to the following indicated pages of the 2001 Annual Report
to Shareholders:
Consolidated Statements of Financial Condition
as of September 30, 2001 and 2000.............................17
Consolidated Statements of Operations
For the Years Ended September 30, 2001, 2000 and 1999.........18
Consolidated Statements of Comprehensive Income
For the Years Ended September 30, 2001, 2000, and
1999............................................................19
Consolidated Statements of Changes in Equity
For the Years Ended September 30, 2001, 2000 and 1999.........20
Consolidated Statements of Cash Flows
For the Years Ended September 30, 2001, 2000 and 1999.........21
Notes to Consolidated Financial Statements......................23
Independent Auditor's Report....................................40
(2) All schedules are omitted because they are not required or applicable, or
the required information is shown in the consolidated financial statements
or the notes thereto.
(3) Exhibits
(a) The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of Northeast Pennsylvania Financial Corp.*
3.2 Bylaws of Northeast Pennsylvania Financial Corp.**
4.0 Form of Stock Certificate of Northeast Pennsylvania Financial Corp.*
10.1 Employment Agreement between Northeast Pennsylvania Financial Corp. and E. Lee Beard***
10.2 Employment Agreement between Northeast Pennsylvania Financial Corp. and Thomas L.
Kennedy***
10.3 Employment Agreement between First Federal Bank and E. Lee Beard***
10.4 Employment Agreement between First Federal Bank and Thomas L. Kennedy***
10.5 Change in Control Agreement between Northeast Pennsylvania Financial Corp. and Patrick
J. Owens, Jr.***
10.6 Change in Control Agreement between First Federal Bank and Patrick J. Owens, Jr.***
10.7 Employment Agreement between Higgins Insurance Associates, Inc. And Joseph P. Schlitzer
10.8 Change in Control Agreement between First Federal Bank and Allan Farias
10.9 Form of First Federal Bank Supplemental Executive Retirement Plan*
10.10 Form of First Federal Bank Employee Severance Compensation Plan*
10.11 Form of First Federal Bank Management Supplemental Executive Retirement Plan*
10.12 Northeast Pennsylvania Financial Corp. 1998 Stock-Based Incentive Plan****
10.13 Northeast Pennsylvania Financial Corp. 2000 Stock Option Plan *****
11.0 Statement regarding Computation of Per Share Earnings (See Notes to Consolidated Financial Statements)
13.0 2001 Annual Report to Shareholders
21.0 Subsidiary information is incorporated by reference to "Part I - Subsidiaries"
23.0 Consent of KPMG LLP
17
* Incorporated herein by reference into this document
from the Exhibits to the Form S- 1 Registration
Statement, and any amendments thereto, Registration No.
333-43281
** Incorporated herein by reference into this document
from the Exhibits to the Form 10-Q for the quarter
ended June 30, 2000 filed on August 14, 2000.
*** Incorporated herein by reference into this document
from the Exhibits to the Company's Form 10-K for the
year ended September 30, 1998.
**** Incorporated herein by reference into this document
from the Proxy Statement for the 1998 Special Meeting
of Shareholders dated September 9, 1998
***** Incorporated herein by reference into this document
from the proxy statement for the 2000 Annual Meeting of
Shareholders dated December 20, 1999
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the fiscal
year covered by this report.
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Northeast Pennsylvania Financial Corp.
By /s/ E. Lee Beard December 21, 2001
----------------------------------
E. Lee Beard
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ E. Lee Beard December 21, 2001
- - -------------------------------------
E. Lee Beard
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Paul Conard December 21, 2001
- - -------------------------------------
Paul Conard
Director
/s/ Dr. William R. Davidson December 21, 2001
- - -------------------------------------
Dr. William R. Davidson
Director
/s/ Barbara Ecker December 21, 2001
- - -------------------------------------
Barbara Ecker
Director
/s/ R. Peter Haentjens, Jr. December 21, 2001
- - -------------------------------------
R. Peter Haentjens, Jr.
Director
/s/ Atty. Thomas L. Kennedy December 21, 2001
- - -------------------------------------
Atty. Thomas L. Kennedy
Chairman of the Board
/s/ Honorable John P. Lavelle December 21, 2001
- - -------------------------------------
Honorable John P. Lavelle
Director
/s/ Michael J. Leib December 21, 2001
- - -------------------------------------
Michael J. Leib
Director
/s/ William J. Spear December 21, 2001
- - -------------------------------------
William J. Spear
Director
/s/ Joseph Schlitzer December 21, 2001
- - -------------------------------------
Joseph Schlitzer
Director
/s/ Patrick J. Owens, Jr. December 21, 2001
- - -------------------------------------
Patrick J. Owens, Jr.
Treasurer, CFO
(Principal Accounting and Financial Officer)